Last week budget supermarket chain Netto announced it was relaunching in the UK, under a new partnership with retail giant Sainsbury's. Management consultancy Boxwood gives its verdict on Netto’s UK relaunch.

Last week saw the exciting re-introduction of the Netto retail brand into the UK. After a four-year hiatus, a new Netto store opened its doors in Leeds – introducing a new competitor into the grocery market, and opening up an entirely new revenue stream for one of the UK’s most established grocery players.

Netto UK is a joint venture between Sainsbury’s and the Denmark-based grocer. In an attempt to expand its customer base and respond to the increasing threat of discounters such as Lidl and Aldi, Sainsbury’s will drive the introduction of 15 Netto stores over the next 12 months.

In contrast to the other major players, Sainsbury’s has resisted the temptation to adopt a deep price-cutting strategy in order to compete with the discounters. Instead, it hopes that by investing in an entirely separate channel and proposition in Netto, it can capture ever-growing demand for value without diluting its core brand.

This presents Sainsbury’s with an interesting dilemma. One of the reasons the discounters are able to offer such low prices is the buying power that comes with scale – £60bn of global scale in Aldi’s case. An obvious strategy for a £20bn Sainsbury’s would be to join buying forces with its Danish partner and drive down product costs. But would this risk diluting the core brand, something that strategically Sainsbury’s is trying to avoid? How would this play out with its current shoppers?

The other challenge, of course, is how to ensure that the Netto proposition is relevant and executed effectively – no easy task in the unforgiving and low-margin world of the UK grocer. Based upon our experience of what it takes to win in the industry, we believe that there are five golden rules the Netto venture needs to adopt in order to succeed in the discount category:

1. Focus relentlessly on the needs of the value-conscious weekly shopper2. Creatively source high quality products at low prices3. Maintain a relevant, but limited range4. Keep a tight rein on operating costs and the property estate5. Invest in development of people and culture

Time will tell whether this bold strategic move from Sainsbury’s will pay off, and there will doubtless be a strong response from competitors on all sides. The team at Boxwood will be keeping a close eye on events, especially whether Netto is adopting the golden rules for success.